The prevailing consensus in 2024 is that the Federal Reserve will cut interest rates. But predicting central bank moves is an inexact science. That said, fixed income investors could use the help of an active strategy to continue extracting higher yields.
Many of the macroeconomic factors present in 2023 should make a reappearance in 2024. This should drench the markets with buckets of volatility. And that could put fixed income investors in a state of anxiety.
“The interest rate hikes, persistent inflation, recession fears and market shocks such as the regional banking crisis in the U.S. were among factors that shaped bond markets in 2023, and several of them will likely also have a significant effect in the year ahead,” reported CNBC.
One potential saving grace for fixed income investors is that yields could still be relatively high even after the Fed pivots from its monetary policy tightening. Counterbalancing that, however, is whether the high-rate environment could potentially spin the economy into a recession. This is another recurring theme present on the wall of worry from 2023.
“Even after these initial rate cuts, interest rates will remain higher, which has caused concerns about how this will affect the economy and whether the U.S. will dip into a recession this year,” the report added.
That said, fixed income investors will want to stay pliable in a changing market. This is where active management and income diversification can be beneficial.
A Mixed Income Approach for 2024
With the expectation that rates will eventually fall, fixed income investors will need a mixed approach that doesn’t just rely solely on bonds. The NEOS Enhanced Income Cash Alternative ETF (CSHI ) accomplishes this by incorporating income generation opportunities using a put-option strategy.
CSHI seeks to distribute monthly income generated from investing in a portfolio of one- to three-month Treasury bills while implementing a data-driven put-option strategy. The active management component allows CSHI to also seek tax loss harvesting opportunities that complements exposure to SPX Index options classified as section 1256 contracts. These contracts can help minimize taxes since they are subject to lower 60/40 tax rates.
The put-option strategy consists of written (sold) and purchased put options on the S&P 500 index. By doing so, the fund seeks to enhance the income generated from the safe haven of T-bills, helping to maintain a low-risk profile.
As of December 31, 2023, CSHI has a distribution yield of 6.03% and a 30-day SEC yield of 5.04%.
For more news, information, and analysis, visit the Tax Efficient Income Channel.